Technology

Flexible Lease Strategies Via Revenue Management Software

In a perfect world, renters would all commit to standard 12-month leases.

And routine, inexpensive turnovers during the prime rental season would bring about the same type of renter, and increasingly higher rents.

But it’s never that simple. Multifamily dwellers are not one monolithic group, and with imperfect job contracts and an air of economic uncertainty, particularly in urban environments, more and more renters are asking for flexible leases. Without revenue management software to lend a helping hand, it’s easy to tell a renter ‘no.’

“Really, we’re not saying ‘no’ to lease terms for the applicant [anymore],” says Kevin Huss, vice president of revenue management at Philadelphia-based Resource Residential. “They have the option to move out whenever they want.”

If an operator has plenty of leases expiring at a specific month, they might have previously been dissuaded to offer a short-term lease. But instead of committing to that blackout period, they can simply charge accordingly so that they’re not losing anything in the process, opening themselves up to create more options for the customer, Huss adds.

“You can balance their timing, their plans with your pricing,” says John Selindh, group vice president of sales and marketing at San Francisco-based BRE properties.

The software allows operators to balance expirations, getting it to follow the demand curve of the property to sustain prices. When flatly determining prices across the year without software, you can hurt profits and minimize the ability to maintain rates at a higher price. The software helps to maintain that; once you offer a flexible lease, the price will vary based on the supply and demand every month, and you can consider variables as the software mirrors curves during peak times.

“If you know your traffic is going to spike in July, it’s going to take more expirations,” Huss says. “It’s going to know that we’re going to have that demand to fill the supply.”

The software allows you to look at traffic patterns every day to see what optimal lease term and price point to offer to maximize rates and occupancy. The system will first set optimal expiration until the price kicks in, and as you have more expirations going on during a particular month, prices will consequently rise.

“We’re OK taking a lease because we know that we’re getting more money throughout that lease term to make up for any added challenges by having additional lease terms and expirations during that period,” Huss says.

The software will consider the floor plan of the unit, the history of its vacancies and rents, and particularly the cost of turning it over to determine price increase. It also looks at the competition, comparing pricing and availability to the local market. If you’re highly occupied, for instance, and only have one apartment available, you can determine what to charge to avoid multiple, poorly-timed vacancies. And depending on how long an apartment has been sitting, in addition to the traffic it receives, the software might strategically drop prices to conform.

Typically, if you’re having problems with occupancy, a longer lease term could also be effective. Locking in an individual to a two-year lease, perhaps, will guarantee that occupancy. At Boston-based WinnDevelopment, a few properties offer multiyear leases with an annual increase to “guarantee income and revenue increases year after year,” says Michelle Tomassetti, WinnDevelopment’s divisional marketing coordinator.

It won’t work in all markets, of course. But in those where rents are projected to go up substantially, it’s a hot sell. “People feel comfortable knowing they’re locked into a specific rate. We feel comfortable knowing that they’re guaranteed occupancy,” she adds.

If you’re primary focus is improving cash flow, though, operators should shy away from two-year leases, allowing themselves time to renew at higher prices. To circumvent the challenges, Selindh, who’s worked with both Rainmaker LRO and Realpage software, suggests using revenue management to charge a premium for a longer term. In a strong growth market, he adds, a company could handle shorter six-month leases to go for higher rents, as opposed to locking into a full-year lease.

Among some of the worries of committing to a long- or short-term lease is having high vacancies during the holiday season. It’s best to have inventory taken care of before struggling to fill it from Thanksgiving to the New Year, when most renters aren’t thinking about moving. But if a vacancy occurs, you can still price accordingly with the software.

“In stable properties, they push lease expirations off to spring so they’re not faced with that challenge,” Tomassetti says. But in any case, they can “ramp up marketing even more, focus on specials to lease now and make incentives for prospect to lease during the holidays.”